This copy is for your personal, non-commercial use only. To order presentation-ready copies for distribution to your colleagues, clients or customers, click the "Reprints" link at the top of any article.

Tax-Evasion Probes Said to Slow

Justice Department has lost almost 30% of tax prosecutors, impeding U.S. crackdown on offshore banks.

The U.S. Justice Department has lost almost 30 percent of its tax prosecutors in the past month, slowing a U.S. crackdown on offshore banks that enabled tax evasion, according to four people familiar with the matter.

Twenty-five of the 95 prosecutors in the tax division left headquarters in Washington for six-month “details” with U.S. attorneys around the country, and another three took permanent assignments, according to the four people, who declined to be identified because they aren’t authorized to speak publicly.

Many of the lawyers handled cases involving foreign banks or financial advisers suspected of helping U.S. clients cheat on taxes, the people said. The transfers came amid criminal probes of at least 11 Swiss financial institutions, including Credit Suisse Group AG, with the tax division leading or assisting each prosecution.

“To move one-third of these people from that effort will significantly compromise such enforcement at the very time it is needed to deal with the huge amounts of offshore cases coming to the tax division,” said Nathan Hochman, a former assistant attorney general who oversaw the tax division under President George W. Bush.

The prosecutors “have significant experience, training and knowledge when it comes to the enforcement of tax laws pertaining to overseas accounts,” said Hochman, now a partner at Bingham McCutchen LLP in Santa Monica, California.

The division also investigates identify theft, illegal tax shelters and other crimes, while approving every tax case filed by the 94 presidentially appointed U.S. attorneys serving the Justice Department around the country.

“Offshore non-compliance by U.S. taxpayers remains a top priority for the Justice Department’s Tax Division,” said Charles Miller, a Justice Department spokesman. “We will continue to pursue those cases vigorously.”

The offshore tax crackdown has expanded since 2007, when the Justice Department and the Internal Revenue Service began focusing on Zurich-based UBS AG, the largest Swiss bank. UBS avoided U.S. prosecution in 2009 by admitting it aided tax evasion, paying $780 million and handing over data on 250 accounts. It later disclosed information on about 4,450 more accounts.

On July 15, Credit Suisse said it was a target of a criminal probe over former cross-border private-banking services for U.S. customers. Six days later, seven current and former Credit Suisse bankers were indicted on a charge of conspiring to help U.S. clients evade taxes through secret accounts. That case was led by prosecutors in the Eastern District of Virginia.

Prosecutors in the Manhattan-based Southern District of New York secured an indictment on Feb. 2 against Wegelin & Co., the 270-year-old private bank that was the first Swiss lender criminally charged.

The IRS said 30,000 U.S. taxpayers with offshore accounts have avoided prosecution since 2009 by entering a limited amnesty program, paying back taxes and saying who helped them hide their accounts from authorities. Hundreds of taxpayers in the program gave prosecutors information that has helped build criminal cases against bankers and advisers.

Moving prosecutors “slows the whole process down considerably,” said Robert Katzberg, a tax attorney at Kaplan & Katzberg in New York.

“You have fewer personnel going through all of the potential charges and the enormous amount of evidence that’s been obtained over the last three years,” Katzberg said. “While the Southern District of New York has been very, very active in a lot of these things, that’s no substitute for the tax division in Washington quarterbacking these cases.”

The prosecutors left under a program offered on Jan. 13 by the Justice Department, which said it would “detail” as many as 100 attorneys and support staff to the U.S. attorney’s offices through Sept. 30, or the end of the fiscal year.

The move was intended to help the offices “address their short-term workforce needs resulting from the Department’s ongoing hiring freeze,” according to a memo by H. Marshall Jarrett of the Executive Office for U.S. Attorneys. The U.S. attorneys weren’t obligated to hire prosecutors permanently, according to the memo.

Another memo listed 155 attorney positions available around the country through the program. Lawyers could help on cases involving narcotics, immigration, organized crime, child trafficking and major frauds, according to the memo.

Senate Hearing

The subject arose at a March 20 hearing before the Senate Finance Committee’s economic growth and fiscal responsibility subcommittee, which examined identity theft and tax fraud.

Senator Richard Burr, a North Carolina Republican, asked about the impact of the moves on the department’s effort to work with the IRS to combat identity fraud.

“We’ve redoubled our efforts to offer resources from the Tax Division to U.S. attorneys in terms of prosecutors and information about how these schemes are working in other jurisdictions,” testified Ronald A. Cimino, deputy assistant attorney general for criminal matters in the tax division.

“Do you think it’s wise to divert a significant portion of the criminal component of the tax division to deal with a non- tax issue?” Burr asked.

“What we in the tax division did, senator, is to place for six months our prosecutors and our civil litigators -- there are actually both -- of the numbers that you referred to across the country,” Cimino said. “In part, when this was done, some of them are working more on their own cases in the jurisdiction.”

President Barack Obama’s second nominee to succeed Hochman as tax division chief, Kathryn Keneally, a New York-based partner at Fulbright & Jaworski LLP, has yet to win Senate confirmation. An earlier choice, Mary L. Smith, was blocked by lawmakers who said she lacked experience in tax law. Keneally, who was approved by the Judiciary Committee in December, hasn’t received a vote from the full Senate.

The job is an important one, Hochman said.

“It serves a leadership role within the organization, a political role in lobbying for additional resources for the division and a symbolic role in promoting the tax division’s mission to the general public,” Hochman said. “Not having someone in that role for that period of time undermines the tax division’s mission.”

Jeffrey Neiman, a former Justice Department prosecutor who worked on the UBS case, likened the transfers to getting rid of half a baseball team on the eve of the championship.

“Between the government’s recent efforts to crack down on offshore tax evasion and the identity-theft epidemic plaguing the IRS, criminal tax enforcement is at a critical point,” said Neiman, who now practices in Fort Lauderdale, Florida.

Treasury & Risk

Treasury & Risk is an online publication and robust website designed to meet the information needs of finance, treasury, and risk management professionals. Our editorial content, delivered through multiple interactive channels, mixes strategic insights from thought leaders with in-depth analysis of best practices, original research projects, and case studies with corporate innovators.